Timing

Companies have until the earlier of (1) their first annual meeting after January 15, 2014, or (2) October 31, 2014, to comply with the new compensation committee independence requirements.

Review Compensation Committee Composition. Companies should review the composition of their compensation committees to assure compliance. As compensation committee members already are subject to independence requirements, many of them likely will continue to qualify as independent under the enhanced standards, although this may be less true under Nasdaq’s listing requirements. Nevertheless, boards of directors will need to go through the process of considering compensation committee members’ independence under the new rules.

Companies are required to comply with the other new standards, including those relating to the authority of compensation committees beginning July 1, 2013.

Adopt Required Charter Amendments. By July 1, 2013, companies will need to review their compensation committee charter and make any changes necessary to comply with the new rules.

Consider Compensation Consultant Conflicts of Interests. In the case of committee consideration of adviser conflicts of interest, notwithstanding the July 1, 2013, effective date of the listing standards, new SEC rules (as described in our alert titled “SEC Adopts Rules Requiring New Listing Standards for Compensation Committees,” June 22, 2012) require disclosure in proxy statements for 2013 annual meetings as to whether retention of a compensation consultant raised any conflict of interest and how the conflict is being addressed. As a result, compensation committees currently should consider the listing requirements relating to adviser conflicts as they engage compensation consultants.

Consider Counsel and Other Adviser Conflicts of Interests. By July 1, 2013, compensation committees will need to consider conflicts of interest before selecting counsel or other advisers.

Companies Subject to the Listing Standards

For both the NYSE and Nasdaq, the new listing requirements apply to companies with common equity securities listed on the exchange. As is currently the case, foreign private issuers may rely on home country standards and disclose how those standards differ from the exchange’s standards applicable to U.S. companies. Smaller reporting companies are not wholly exempt from these rules, but are exempt from the enhanced independence standards and the committee responsibility to review consultant, counsel and adviser conflicts of interests. The NYSE and Nasdaq will continue to apply phase-in periods for companies in connection with their IPOs and exclude controlled companies, companies in bankruptcy, open-end management investment companies registered under the Investment Company Act of 1940 and limited partnerships.

Certification. Nasdaq companies will have to certify to Nasdaq, no later than 30 days after the applicable deadline (the earlier of (1) their first annual meeting after January 15, 2014, or (2) October 31, 2014), that they have complied with the new compensation committee rules. While there is no new NYSE certification requirement, NYSE-listed companies will continue to provide annual written affirmations certifying compliance with the NYSE corporate governance listing standards.

Enhanced Compensation Committee Independence

NYSE. A member of the compensation committee of a NYSE-listed company is still required to qualify as an independent director under the NYSE’s general standards on director independence. In addition, the committee member also must satisfy additional independence requirements. Specifically, the board of directors of the listed company would be required to affirmatively determine the independence of compensation committee members considering all factors “specifically relevant to determining whether a director has a relationship to the listed company which is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member.” Those factors would include:

Source of director’s compensation. Compensation includes any consulting, advisory or other compensatory fees paid by the listed company to the director. The commentary provides that the board of directors should consider whether the director receives compensation from any person or entity that would impair the director’s ability to make independent judgments about the listed company’s executive compensation.

Affiliation with the listed company. The commentary provides that the board of directors should consider whether an affiliate relationship places the director under the direct or indirect control of the listed company or its senior management or whether it creates a direct relationship between the director and senior management, in each case of a nature that would impair the director’s ability to make independent judgments about the listed company’s executive compensation.

The NYSE did not adopt any “bright-line” tests for compensation committee independence beyond the existing “bright-line” director independence standards.

Nasdaq. While the NYSE approach leaves room for board judgment, the Nasdaq approach on consulting and advisory fees is a “bright line” approach equivalent to the audit committee independence standards. A member of the compensation committee for a Nasdaq-listed company must qualify as an independent director under Nasdaq’s general standards of director independence and must not accept, directly or indirectly, any consulting, advisory or other compensatory fees from the listed company or any subsidiary of the company. For this purpose, compensatory fees exclude fees for board and committee service and fixed amounts of compensation under a retirement plan for prior service. As is the case for audit committee independence, there is no “look back” for the “no consulting, advisory or compensatory fees” test.

In addition, the board must consider whether the compensation committee member is affiliated with the company and whether such affiliation would impair the director’s judgment as a member of the compensation committee. In commentary, Nasdaq states that ownership of company stock, even if a controlling interest, would not preclude a board determination of independence and that it may, in fact, be appropriate for representatives of significant stockholders to serve on compensation committees since their interests likely are aligned with other stockholders in seeking an appropriate executive compensation program.

Compensation Committee Authority/Required Charter Amendments

The Nasdaq listing requirement will require companies to have a compensation committee of at least two independent directors. Although Nasdaq currently provides an alternative where compensation matters could be handled by the independent directors as a group, most Nasdaq-listed companies already have a compensation committee with at least two independent directors.

Pursuant to the Nasdaq rules, the compensation committee must have a formal written charter. The charter would have to reflect the committee’s responsibilities, including structure, processes and membership requirements, as well as the committee’s responsibility for determining (or recommending to the board of directors for determination) the compensation of the company’s chief executive officer and all other executive officers of the company. The charter also would need to specify that the company’s chief executive officer may not be present during voting or deliberations on his or her compensation. And finally, the committee charter must specify the specific committee responsibilities and authorities to retain compensation consultants, legal counsel and offer advisers, at company expense, and to consider adviser conflicts. The committee is required to review and reassess the adequacy of the charter on an annual basis.

Pursuant to the NYSE rules, the compensation committee charter must be amended to reflect the rights and responsibilities of the compensation committee under the Dodd-Frank compensation committee rules. Although most NYSE-listed company charters already reflect the committee authority to retain consultants, counsel and advisers, most charters will need to be amended with respect to committee consideration of adviser conflicts.

Adviser Conflicts

Both the NYSE and Nasdaq listing standards will require compensation committee charters to reflect the committee’s responsibility to consider conflicts of interest before selecting consultants, counsel or advisers. As set forth in the listing standards, the committee must take into consideration the following factors:

the provision of other services to the listed company by the person that employs the compensation consultant, counsel or other adviser (the firm);

the amount of fees received from the listed company by the firm as a percentage of total firm revenue;

the firm’s policies and procedures designed to prevent conflicts of interest;

any business or personal relationship of the compensation consultant, counsel or other adviser with a member of the compensation committee;

any listed company stock owned by the consultant, counsel or adviser; and

any business or personal relationship of the consultant, counsel or adviser or the firm with an executive officer of the listed company.

Both the NYSE and Nasdaq specify that there is no need for the committee to undertake this review in connection with obtaining the advice of in-house legal counsel or any consultant, legal counsel or other adviser whose role is limited to activities for which no disclosure would be required under Item 407(e)(3)(iii) of Regulation S-K (consulting on broad-based plans and information that is not customized for a particular company or that is customized based on parameters that are not developed by the adviser and about which the adviser does not provide advice).

Importantly, both the NYSE and Nasdaq specify that the listing standards do not require a compensation consultant, counsel or other adviser to be independent, only that the compensation committee consider the enumerated factors before selecting or receiving advice. The NYSE and Nasdaq explicitly affirm compensation committees’ ability to use any advisers preferred by the committee, regardless of independence.

Latest Posts

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

"My best business intelligence, in one easy email…"

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.

Privacy Policy (Updated: October 8, 2015):

hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide

*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.